Entrepreneurship-Decisions and Downfalls

Entrepreneurship is an attractive career choice. But many decisions have to be made before launching and managing a new business, no matter its size. Among the questions that need to be answered are:

• Does the individual truly want to be responsible for a business?
• What product or service should be the basis of the business?
• What is the market, and where should it be located?
• Is the potential of the business enough to provide a living wage for its employees and the owner?
• How can a person raise the capital to get started?
• Should an individual work full or part time to start a new business? 
• Should the person start alone or with partners?

Answers to these questions are not empirically right or wrong. Rather, the answers will be based on each entrepreneur’s judgment. An entrepreneur gathers as much information and advice as possible before making these and other crucial decisions.

The entrepreneur’s challenge is to balance decisiveness with caution—to be a person of action who does not procrastinate before seizing an opportunity—and at the same time, to be ready for an opportunity by having done all the preparatory work possible to reduce the risks of the new endeavor.

Preparatory work includes evaluating the market opportunity, developing the product or service, preparing a good business plan, figuring out how much capital is needed, and making arrangements to obtain that capital.

Through careful analysis of entrepreneurs’ successes and failures, economists have identified key factors for up-and-coming business owners to consider closely. Taking them into account can reduce risk. In contrast, paying them no attention can precipitate the downfall of a new enterprise. 

• Motivation : What is the incentive for starting a business? Is it money alone? True, many entrepreneurs achieve great wealth. However, money is almost always tight in the startup and early phases of a new business. Many entrepreneurs do not even take a salary until they can do so and still leave the firm with a positive cash flow.

• Strategy : What is the strategy for distinguishing the product or service? ? Is the plan to compete solely on the basis of selling price? Price is important, but most economists agree that it is extremely risky to compete on price alone. Large firms that produce huge quantities have the advantage in lowering costs.

• Realistic Vision : Is there a realistic vision of the enterprise’s potential? Insufficient operating funds are the cause of many failed businesses. Entrepreneurs often underestimate start-up costs and overestimate sales revenues in their business plans. Some analysts advise adding 50 percent to final cost estimates and reducing sales projections. Only then can the entrepreneur examine cash flow projections and decide if he or she is ready to launch a new business. 

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What is meant by entrepreneurship?

What is meant by entrepreneurship? 

The concept of entrepreneurship was first established in the 1700s, and the meaning has evolved ever since. Many simply equate it with starting one’s own business. Most economists believe it is more than that.

To some economists, the entrepreneur is one who is willing to bear the risk of a new venture if there is a significant chance for profit. Others emphasize the entrepreneur’s role as an innovator who markets his innovation. Still other economists say that entrepreneurs develop new goods or processes that the market demands and are not currently being supplied.

In the 20th century, economist Joseph Schumpeter (1883-1950) focused on how the entrepreneur’s drive for innovation and improvement creates upheaval and change. Schumpeter viewed entrepreneurship as a force of “creative destruction. ” The entrepreneur carries out “new combinations,” thereby helping render old industries obsolete. Established ways of doing business are destroyed by the creation of new and better ways to do them. Business expert Peter Drucker (1909-2005) took this idea further, describing the entrepreneur as someone who actually searches for change, responds to it, and exploits change as an opportunity. A quick look at changes in communications—from typewriters to personal computers to the Internet—illustrates these ideas. 

 Most economists today agree that entrepreneurship is a necessary ingredient for stimulating economic growth and employment opportunities in all societies. In the developing world, successful small businesses are the primary engines of job creation, income growth, and poverty reduction.  Therefore, government support for entrepreneurship is a crucial strategy for economic development. 

As the Business and Industry Advisory Committee to the Organization for Economic Cooperation and Development (OECD) said in 2003,  “Policies to foster entrepreneurship are essential to job creation and economic growth.” Government officials can provide incentives that encourage entrepreneurs to risk attempting new ventures.  Among these are laws to enforce property rights and to encourage a competitive 

market system. 

 The culture of a community also may influence how much entrepreneurship there is within it. Different levels of entrepreneurship may stem from cultural differences that make entrepreneurship more or less rewarding personally. A community that accords the highest status to those at the top of hierarchical organizations or those with professional expertise may discourage entrepreneurship. A culture or policy that accords high status to the “self-made” individual is more likely to encourage entrepreneurship. 

This overview is the first in a series of one-page essays about the fundamental elements of entrepreneurship. Each paper combines the thinking of mainstream economic theorists with examples of practices that are common to entrepreneurship in many countries. 

The series attempts to answer:

Why and how do people become entrepreneurs?

•  Why is entrepreneurship beneficial to an economy?

•  How can governments encourage entrepreneurship, 

and, with it, economic growth? 

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